1. Slides prepared by Thomas Bishop Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 1 Introduction

2. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-2 Why is the international economics so important? International economics is an old subject, but it continues to grow in importance as countries become tied to the international economy.

3. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-3 Can you feel it important? Automobiles Wal-Mart Gulf War

4. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-4 Discussion Form a group with four or five persons Introduce yourself to your group members Find another two cases around you or your group members to show how important the international economics is. Select two representatives each group to come to the front the classroom. One introduces your group members for us. The other introduces the case your group figured out.

5. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-5 Trade Part

6. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-6 How about Canada?

7. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-7 Fig. 1-1: Exports and Imports as a Percentage of U.S. National Income Source: U.S. Bureau of Economic Analysis

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-8 Fig. 1-2: Exports and Imports as Percentage of National Income in 2005 Source: Organization for Economic Cooperation and Development

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-9 Finance Part

10. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-10 Sub-prime Loan Credit Risk The crisis began with the bursting of the US housing bubble and high default rates on "subprime" and adjustable rate mortgages (ARM).

11. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-11 Sub-prime Loan Credit Risk In September 2007, Northern Rock, a British Bank, experienced an old fashioned "run on the bank" after it was revealed that the bank was having trouble raising liquidity. This was the first bank run in Britain since 1866.

12. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-12 Sub-prime Loan Credit Risk The Bank of China (the #2 bank in China) announced in August of 2007, that it holds $9.7 billion dollars of US Subprime debt. In January of 2008, Korean markets fell due to the "selling spree" of shares of US mortgages.

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-13 Sub-prime Loan Credit Risk The worldwide losses stemming from the US subprime mortgage crisis could run to $945 billion.

14. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-14 What Is International Economics About? International economics is about how nations interact through trade of goods and services (trade), through flows of money and through investment (finance). Nations are more closely linked through trade in goods and services, through flows of money, and through investment than ever before. Is it good for different countries?

15. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-15 What Is Your Answer? YES

16. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-16 Domestic Trade VS. International Trade Case 1: BC buys cars from ON Case 2: BC imports cars from US or Europe?

17. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-17 Common Points? The same motives The same behaviors of individuals Difference? The domestic trade happens within one country. The international trade happens between different sovereign states. (Different currencies /different trade policies /different law systems, etc.)

18. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-18 The Effect of the US-Canadian Border

19. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-19 Gains from Trade Several ideas underlie the gains from trade 1.When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off. (Rationality, cost and benefit analysis).

20. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-20 Gains from Trade (cont.) 2.How could a country that is the most (least) efficient producer of everything gain from trade?  With a finite amount of resources, countries can use those resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume.  Countries can specialize in production, while consuming many goods and services through trade.

21. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-21 Gains from Trade (cont.) 3.Trade is predicted to benefit a country by making it more efficient when it exports goods which use abundant resources and imports goods which use scarce resources. 4.When countries specialize, they may also be more efficient due to large scale production. 5.Countries may also gain by trading current resources for future resources (lending and borrowing).

22. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-22 Gains from Trade (cont.) Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country.  Trade may therefore have effects on the distribution of income within a country. (Imports are always good for consumers)  A conclusion to make: Conflicts about trade should occur between groups within countries rather than between countries.

23. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-23 Patterns of Trade Differences in climate (Canada exports ice-wine but South Africa does not. Or Brazil exports coffee. Do we have local coffee?) Differences in resources (Australia exports iron ore, while Alberta exports oil.) Differences in labor productivity (Japan exports automobiles, while the U.S. exports aircraft?) Differences in relative supplies of capital, labor and land used in the production of different goods and services (Labor-intensive industries)

24. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-24 The Effects of Government Policies on Trade Policy makers affect the amount of trade through  tariffs: a tax on imports or exports,  quotas: a quantity restriction on imports or exports,  export subsidies: a payment to producers that export,  or through other regulations (ex., product specifications) that exclude foreign products from the market, but still allow domestic products. What are the costs and benefits of these policies? How to an answer, as an economist?

25. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-25 How to analyze this problem as an economist? To design models that try to measure the effects of different trade policies. If a government must restrict trade, which policy should it use? If a government must restrict trade, how much should it restrict trade? If a government restricts trade, what are the costs if foreign governments respond likewise? Etc.

26. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-26 International Finance Topics Governments measure the value of exports and imports, as well as the value of financial assets that flow into and out of their countries.

27. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-27 International Finance Topics (cont.) Exchange Rate --- an important financial issue for most governments.  Exchange rates measure how much domestic currency can be exchanged for foreign currency.

28. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-28 International Trade Vs. International Finance International trade focuses on transactions of goods and services across nations.  These transactions usually involve a physical movement of goods or a commitment of tangible resources like labor services. International finance focuses on financial or monetary transactions across nations.  For example, purchases of U.S. dollars or financial assets by Europeans.

29. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 1-29 A Road Map International trade topics  International trade theory (chapters 2–7)  International trade policy (chapters 8–11) International finance topics  Exchange rates and open economy macroeconomics (chapters 12–14)